To catch the future of payment schemes, go underground. Beneath the streets of the nation’s capital, more than 60 percent of peak-time riders on the Metro (Washington, DC’s subway network) have switched from magnetic-stripe tickets to “smart cards” embedded with memory chips and radio transponders. Riders can load as much as $200 into their SmarTrip cards at a kiosk or over the Internet. Antennae built into subway turnstiles pick up radio signals from the cards and convert them into streams of bits that denote the embarkation point and subtract money from the card’s memory. Similar systems are being planned for other U.S. cities, and next year London will adopt these newfangled fare cards for its famous double-decker buses and massive Underground subway network.
But the ultimate destiny of such electronic-payment devices goes way beyond multibillion-dollar public-transit projects. Smart cards and rival gadgets are rapidly evolving into technology platforms that could trigger changes in everything from urban commerce and suburban shopping sprees to national security. Commuters could eventually use such devices not only to buy coffee and newspapers, but also to store bus transfers, hold medical records and drug prescriptions, download coupons, and redeem tickets to museums and sporting events. “The current thrust is to reduce or eliminate the cash handled by these fare collection systems,” says David de Kozan, vice president of market planning and support at San Diego-based Cubic Transportation Systems, which supplies cards and readers to the Washington and London transit networks. “But the technology can also provide other tools. You could rent out spaces on the card for different applications.”
And so the competition to produce and popularize the most secure, the most convenient, and the most versatile high-tech payment system is heating up. One contestant in this race is indeed the smart card, which incorporates not only a memory chip but also a microprocessor. Touted for more than a decade and already popular in Europe, the cards have yet to make it big in the United States, Washington’s Metro notwithstanding. Meanwhile, radio wave transponder tags that supply identification data, as well as coin-size microprocessors that store security codes and encrypted money are gaining ground.
The merchants, banks, and device manufacturers that figure out and deliver what people want from these technologies stand to reap a rich bounty of profits and transaction fees on the $5.7 trillion in annual credit- and debit-card purchasing worldwide-not to mention tens of billions of dollars more in the market for secure identification, subway payment, and other applications.
It won’t be easy. Credit card companies and banks have long pined for a large-scale rollout of microchip-based payment devices mainly because storing customers’ identity data on chips has proved a more secure and reliable way to prevent fraud than encoding data on a traditional magnetic stripe. And because consumers are not liable for transactions conducted using their stolen identities, merchants and banks eat the estimated $4 billion in annual losses. In high-profile tests-most notably Visa’s trial at the 1996 Olympic Games in Atlanta and a 1998 Citibank and Chase Manhattan experiment on Manhattan’s Upper West Side-stored-value smart cards have been resounding flops. Not only that, the costs of implementing a new system are formidable. Diana Knox, senior vice president of emerging channels at Visa U.S.A., estimates that it would cost $11 billion to replace magnetic-stripe cards and upgrade U.S. authorization terminals and networks. “The infrastructure hurdles are enormous, and there isn’t much money in processing small transactions,” Knox says.
That is why smart cards have for years been a technology in search of compelling applications. Yet it is a quest that is quickly gaining new urgency-and not just beneath the streets of Washington and London. Retailers such as Target Stores are introducing smart cards that can receive and redeem digital coupons and other incentives. And over the next few years, the credit card industry will mandate that many European, Asian, and Latin American countries replace magnetic-stripe credit cards with smart cards. Toni Merschen, senior vice president for chip and mobile commerce at MasterCard International’s laboratory in Waterloo, Belgium, says, “We have a big global migration ahead of us.”